Dawn Capital defies venture capital downturn with $700 million fund

Dawn Capital, one of Europe’s biggest backers of business-to-business software companies, raised $700 million in two new funds — doubling down on its bid to find technology champions in the region at a time when venture capital funding for tech startups has dwindled.

The London-based VC firm is one of the most prominent tech investors in the continent, with a portfolio that includes the likes of Swedish online payments firm iZettle, which was acquired by PayPal for $2.2 billion in 2018, and Swedish open banking company Tink, which Visa acquired for 1.8 billion euros ($1.9 billion) in 2022.

Hannah Gubbins, a newly promoted partner at Dawn Capital, said raising the new funds in a time when private startup company valuations have tanked and investor sentiment toward technology has soured was far from easy — but that it came down to deep relationships with institutional investors built up over years.

“For us, the LP [limited partner] side, even those that weren’t building programs in venture where lots of people felt historically, 18 months ago, they ought to be allocating a lot more to venture,” Gubbins told CNBC in an interview.

“Suddenly with everything with the markets and the denominator effect, their private book was overallocated even if technically by their own benchmarks they weren’t. That meant a lot of funds could only reup with existing managers or those with high convictions.”

“It’s the same as in those cycles where there is still capital out there, there are still investors investing. Investors are excited to be investing in this market,” Gubbins added. “There’s some of the best companies, some of the best vintages have come out of the dotcom [bubble], out of the global financial crisis. They know that, they sit on the data.”

Dawn Capital plans to invest in 20 companies with the new funds, which is the firm’s fifth to date. Dawn V will be split into two distinct funds: a $620 million early-stage fund for Series A and Series B investments, and an $80 million “opportunities” fund aimed at backing winners in Dawn Capital’s portfolio that may go on to exit through an initial public offering or takeover later in their business lifecycle.

Venture capital investment has fallen off a cliff as investors reevaluate their allocations amid higher interest rates and rising inflation.

With rates at multi-year highs, innovative, growth-oriented companies that are making losses and that take longer to make a return on their investments have become less attractive. Stodgy, profitable firms with more stable revenue streams, on the other hand, are seeing greater interest.

Investors have been watching the initial public offerings of firms like U.K. chip designer Arm and U.S. grocery delivery firm Instacart for signs of a comeback in tech.

Tech boomed in 2020 and 2021 as the Covid-19 pandemic led to a surge in the use of online platforms for just about everything from shopping to remote work. Ultra-low interest rates from central banks aimed at propping up the economy also worked to ensure it was much easier to raise money. But all that has changed dramatically in the past year or so.

Gubbins said she doesn’t have a crystal ball for when the IPO market will officially open up again. However, she said, Dawn Capital is following the debuts of Arm and Instacart closely as it searches for signs of when the dust will settle on the public listings front.

Gubbins stressed that an IPO isn’t the only exit path available to founders. She highlighted the acquisition of LeanIX, an enterprise architecture management software company in Dawn’s portfolio, by German software titan SAP as an example of European technology firms seeing successes when it comes to exits.

One area defying the declines in tech is artificial intelligence — where investment is booming. AI has had billions of dollars’ worth of investments flowing into companies, particularly firms working on so-called “foundational models” capable of generating new content from written prompts, such as OpenAI, Anthropic and Cohere.

Gubbins said that AI has proven a standout part of conversations with limited partners. However, the focus for Dawn Capital, she said, remains investing in a broad range of business-to-business software companies in fields ranging from fintech to security and infrastructure.

“We’re doubling down on what we’ve always done,” she said. “AI is absolutely one of the areas we’re looking at. Both investing in AI companies but also as something that’s disrupting every sector and company.”